June 2021: As many businesses face the financial impact of four more weeks before pandemic restrictions lift, small business owners who have become personal guarantors for CBILS loans over £250,000 are being warned that lenders will come to them first, if they default on the loan – not the Government.
By 21st June 2020, 50,482 loans had been approved under the CBILS to the value of £10.53bn. By the end of the scheme, £23.28bn had been loaned through 98,344 facilities[i]. Over 8% of the total money loaned required a personal guarantee by the owner or director of the business and the average personal guarantee backed loan value reached £774,389[ii].
Purbeck Personal Guarantee Insurance, provider of the UK’s only Personal Guarantee Insurance has been contacted by small business owners under the mistaken belief that the 80% government guarantee will step in first, protecting the owner or director from immediate personal financial loss in an insolvency. However, in practice the guarantee would be called in first by the lender before the lender claims on the 80% government guarantee. Whilst the personal guarantees are limited to 20% of outstanding amounts following the proceeds of business assets (during insolvency), a business owner taking a £1m loan could be facing a personal loss of £100,000. (See illustration). This is the case for both CBILS and RLS loans.
Keir Cox, Operations Director for Purbeck Personal Guarantee Insurance, said: “We are speaking to small business owners every day who have taken the significant step of signing a Personal Guarantee to access funding for their business, some through CBILS. A worrying proportion of those with CBILS or RLS loans are under the mistaken belief that if their business fails, their personal assets will be called on last, not first, which is the reality. This has heightened the value of Personal Guarantee Insurance which can mitigate the risks of Personal Guarantees for CBILS loans, new loans secured under the Recovery Loan Scheme or those arranged outside of the Government’s support schemes.
“Ultimately those business owners who have signed Personal Guarantees for a CBILS loan should be under no illusion over the risk this poses to their personal assets. While 20% of the outstanding amount is far more palatable than 80%, there could still be a sizeable sum to be found in the early stages of insolvency. We urge businesses to speak to their lender at the earliest opportunity if they believe they will face repayment difficulties, particularly those firms for whom the delay to restrictions lifting will be a bitter financial blow.”
- - £1,000,000 CBILS/RLS loan supported by fixed charge and £200,000 personal guarantee.
- - Business defaults owing £800,000 (as some of the loan has been repaid) and enters an insolvency procedure.
- - The insolvency practitioner, via liquidation, recovers assets on behalf of creditors; as the lender has a fixed charge, realises £300,000 against the CBILS/RLS loan leaving £500,000 outstanding.
- - The lender calls on the personal guarantee at £100,000 (i.e. 20% of the outstanding amount) leaving £400,000 as a loss.
- - The lender calls on government guarantee (80% of loss) - £320,000.
- - Lender loses £80,000.
[ii] FOI Request for breakdown of loans secured over £250,000 where a personal guarantee was required by the lender